[Federal Register Volume 63, Number 233 (Friday, December 4, 1998)]
[Notices]
[Pages 67157-67160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32324]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40717; File No. SR-MSRB-97-15]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Granting Approval of Proposed Rule Change and Amendment
No. 1 Relating to Rules G-11, on Sales of New Issue Municipal
Securities During the Underwriting Period, G-12, on Uniform Practice,
and G-8, on Books and Records
November 27, 1998.
I. Introduction
On December 23, 1997, the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Rules G-11, on sales of
new issue municipal securities during the underwriting period, G-12, on
uniform practice, and G-8, on books and records. Notice of the proposed
rule change appeared in the Federal Register on April 21, 1998.\3\ The
Commission received two comment letters concerning the proposed rule
change.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Rel. No. 39873 (April 14, 1998),
63 FR 19775.
\4\ Letters from George Brakatselos, Vice President, The Bond
Market Association, to Secretary, Securities and Exchange
Commission, dated May 12, 1998 (``TBMA Letter No. 1'') and David B.
Levy, Director & Associate General Counsel, Capital Markets
Division, SalomonSmithBarnery, to Secretary, Securities and Exchange
Commission, dated May 13, 1998 (``Salomon Letter'').
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The MSRB received one comment letter concerning the proposed rule
change.\5\ On August 18, 1998, the Board submitted Amendment No. 1 to
Rule G-11(g)(i) of the proposed rule change on sales of new issue
municipal securities during the underwriting period. Notice of
Amendment No. 1 appeared in the Federal Register on September 29,
1998.\6\ The Commission received one comment letter concerning
Amendment No. 1.\7\ This order approves the proposed rule change and
Amendment No. 1.
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\5\ Letter from Mark Page, Deputy Director and General Counsel,
Office of Management and Budget and John White, Deputy Comptroller
for Public Finance, New York City Comptroller's Office, City of New
York, to Terry L. Atkinson, Chairman, MSRB, dated June 5, 1998
(``HYC Letter''). The Board concurred with the NYC Letter that Rule
G-11(g)(1) should not be interpreted to required that a bond
purchase agreement (``BPA'') be signed within 24 hours of the
sending of the commitment wire. As the Board would not meet again
before August 1998, it consented to an extension for Commission
action until August 31, 1998. Letter from Ronald W. Smith, Senior
Legal Associate, MSRB, to Mignon McLemore Esq., Division of Market
Regulation, SEC, dated June 26, 1998.
\6\ Securities Exchange Act Rel. No. 40456 (September 22, 1998),
63 FR 51976 (``Amendment No. 1'').
\7\ Letter from Sarah M. Starkweather, Vice President and
Associate General Counsel, The Bond Market Association, to Jonathan
G. Katz, Secretary, SEC, dated October 19, 1998 (``TBMA Letter No.
2'').
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II. Description of the Proposal and Amendment No. 1
The proposed rule change requires the managing underwriter of a
syndicate to maintain a record of all issuer syndicate requirements;
requires the managing underwriter to complete the allocation of
securities within 24 hours of the sending of the commitment wire;
requires the managing underwriter to disclose to syndicate members all
available designation information; requires the managing underwriter to
disclose to members of the syndicate, in writing, the amount of any
portion of the take-down that is directed to each member of the
syndicate by the issuer; and shortens the deadline for payment of
designations to 30 calendar days after the issuer delivers the
securities to the syndicate.
Amendment No. 1 retains the requirement of the proposed change to
Rule G-11(g)(i) to complete the allocation of securities within 24
hours of the sending of the commitment wire. It further provides that,
if the bond purchase agreement (``BPA'') is not yet signed or if the
award has not been made at the time allocations are made, the
allocations are subject to the signing of the BPA or the award of
bonds. The purchaser must be informed of this fact.
Issuer syndicate requirements
Issuer requirements involving syndicate formation, order review,
designation policies and bond allocations have become much more
prevalent in the municipal securities market. Such requirements are
significant because they help to determine which dealers, and
ultimately which investors, obtain the bonds. As issuer syndicate
requirements can affect the functioning of the syndicate, and at times
the final costs to the issuer of the new issue, the records of such
requirements should be maintained so that any problems or concerns
regarding the functioning of the syndicate arising from these
requirements can be identified and addressed and the information must
be provided to syndicate members and others, upon request.
The proposed rule change amends Rules G-8(a)(viii) and G-11(f) to
require the managing underwriter to maintain a record of all issuer
syndicate requirements. If the requirements are in a published
guideline, the guideline should be maintained by the dealer and
supplemented by a statement of any additional requirements that arise
prior to settlement. If the requirements are not in published form, the
managing underwriter must create a written detailed statement of the
requirements and maintain the statement in its records. The managing
underwriter must provide a copy of the published guideline or
underwriter prepared statement of issuer syndicate requirements to
syndicate members prior to the first offer of any securities by the
syndicate. Syndicate members must furnish this summary promptly to
others, upon request. In addition, the managing underwriter must
provide the
[[Page 67158]]
issuer with a copy of any such statement for its review.
Disclosure of designation information
The proposed rule change amends Rule G-11(g) to require that the
managing underwriter disclose to syndicate members all available
designation information within 10 business days following the date of
sale and all information with the sending of the designation checks.
Payment of designations
The proposed rule change amends Rule G-12(k) to move the deadline
for payment of designations from 30 business days following delivery of
the securities to the customer to 30 calendar dates after the issuer
delivers the securities to the syndicate.
Disclosure of take-down
A small number of issuers are ``setting aside,'' or holding back,
at their discretion, a portion of the take-down \8\ to direct to
syndicate members. As this issuer ``set-aside'' is part of the take-
down, it should be disclosed to syndicate members in the same manner as
customer designations. The proposed rule change amends Rule G-11(g) to
require the managing underwriter to disclose to members of the
syndicate, in writing, the amount of any portion of the take-down that
is directed to each member of the syndicate by the issuer. Such
disclosure must be made by the later of 15 business days following the
date of sale or three business days following receipt by the managing
underwriter of notification of such set-asides by the issuer.
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\8\ The takedown is normally the largest component of the
spread, similar to a commission, which represents the income derived
from the sale of securities.
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Allocation of securities
The proposed rule change amends Rule G-11(g) to require the
managing underwriter to complete the allocation of securities within 24
hours of the sending of the commitment wire. This amendment attempts to
address delays in allocations of securities which may be the result of
issuers and financial advisors failing to review orders and proposed
allocations in a timely fashion. In case where there is a delay in
allocation, investors may find it difficult to finalize their portfolio
positions when their orders remain unfilled for as long as two or more
days after the end of the order period. Moreover, during volatile
market conditions, delays in allocations hurt the prospect for a
successful underwriting.
Amendment No. 1
The proposed rule change requiring the managing underwriter to
complete the allocation of securities within 24 hours of the sending of
the commitment wire implies that the BPA will be signed prior to the
completion of the allocation. It is possible that allocations may be
completed (and investors notified of these allocations) prior to the
signing of the BPA. Amendment No. 1, therefore, revises the proposed
rule change to include this exception in the rule language.
III. Summary of Comments
The Commission received two comment letters \9\ concerning the
proposed rule change and one comment letter \10\ concerning Amendment
No. 1. The Commission requested and received a response to these
comments from the MSRB.\11\ The MSRB received one comment letter from
New York City.\12\ In response to issues raised in this letter, the
MSRB submitted Amendment No. 1 to the Commission.\13\
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\9\ See note 4 supra.
\10\ See note 7 supra.
\11\ Letter from Ron W. Smith, Senior Legal Associate, MSRB, to
Mignon McLemore, Attorney, Division of Market Regulation, SEC, dated
June 10, 1998 (``MSRB Letter''). The TBMA's second letter was
received after the MSRB Letter. The Commission believes the MSRB's
letter sufficiently addresses both TBMA letters, because TBMA's
second letter reiterates much of its submission.
\12\ See note 5 supra.
\13\ See note 6 supra.
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TBMA strongly opposed the proposed amendments which would require
the managing underwriter to maintain and, where applicable, record all
issuer requirements involving syndicate formation, order review,
designation policies, and bond allocations.\14\ Any requirement that
would result in underwriters spending substantial amounts of time
preparing documents and obtaining issuer approvals is neither
productive nor practical.\15\ TBMA suggested that ``issuers seeking to
impose their requirements on syndicates must take the initiative to
enunciate such requirements, in writing, and publish them so they are
available to all who are involved, or considering becoming involved, in
a syndicate for that issuer.'' \16\
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\14\ TBMA Letter No. 1 at 1.
\15\ Id at 1-2.
\16\ Id at 2.
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According to the Board, ``managing underwriters currently take
issuer direction on syndicate matters and release such information to
the syndicate members.'' \17\ Thus, the proposed amendments are
essentially codifying current syndicate practices.\18\ The Commission
agrees with the Board that the additional requirements should not be
unduly burdensome to the managing underwriter, as they are codifying
existing practices. The Commission notes that dealers can address other
issuer problems through contract.
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\17\ MSRB Letter at 1.
\18\ Id.
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TBMA also opposed the amendment to Rule G-11(g). The amendment not
only established a time limit for completing the allocation of
securities, it also urged issuers and their financial advisors to
review orders and proposed allocations as soon as possible so as not to
delay dissemination of information to investors.\19\ While TBMA
supports prompt completion of the allocation, it strongly opposed the
amendment because, as drafted, the lead manager's compliance would be
wholly dependent upon the timely performance of financial advisors and
issuers.\20\ TBMA noted that it generally opposes any attempts by the
MSRB to modify the behavior of entities that are not directly regulated
by the MSRB through the regulation of the dealer community.\21\ ``A
municipal securities dealer should not be faced with a possible
violation of MSRB rules where compliance by the dealer is dependent
upon a specific action of an unregulated entity.'' \22\ This places the
dealer in the untenable position of being charged with a violation of
MSRB rules through no fault of its own.\23\
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\19\ TBMA Letter No. 1 at 2.
\20\ Id.
\21\ Id. See also Salomon Letter at 1.
\22\ Id.
\23\ Id. See also Salomon Letter at 1 (stating that municipal
securities dealers should neither be forced to ``police'' the
activities of unregulated entities nor be faced with regulatory
sanctions for activities that are beyond their direct control).
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The Board determined to adopt the proposed rule change as drafted,
because it will assist investors by greatly facilitating the allocation
process.\24\ According to the MSRB, delays in allocations can adversely
affect investors' portfolio positions and the underwriting.\25\ By
placing a time limit on the allocation of the securities, the Board
believes underwriters will ensure compliance with the proposal by
either including a provision in the BPA or otherwise reaching an
agreement with issuers, that allocations must be completed within the
24 hour timeframe.\26\ ``If issuers or financial advisors wish to
review orders and proposed allocations, they will have to
[[Page 67159]]
do so within 24 hours.'' \27\ The Commission believes that any
unnecessary delay in distribution securities, once the BPA has been
executed, can disadvantage syndicate members and ultimately, investors.
Thus the Commission supports the shortened timeframe in which syndicate
managers must complete the allocation of securities.
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\24\ MSRB Letter at 2.
\25\ Id.
\26\ Id.
\27\ Id.
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In its second letter, TBMA reiterated its opposition to the
proposed rule change.\28\ However, TBMA did agree with the specific
proposal in Amendment No. 1 which provides that allocations completed
prior to execution of the BPA would be made subject to execution of
that agreement.\29\ As the TBMA's positions remain unchanged, the
MSRB's response sufficiently addresses the issues raised in the second
letter.
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\28\ TBMA Letter No. 2 at 1-2.
\29\ Id. at 2.
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Salomon generally opposed the proposed rule change for reasons
similar to those stated by TBMA.\30\ Specifically, Salomon believed
that syndicate members would be the economic beneficiaries of these
changes and senior managers would bear the cost.\31\ According to
Salomon, the cost of doing business in municipal securities has
increased while the revenue generated by the business has
decreased.\32\ Moreover, each time the syndicate requirements are
modified, the senior managers expend significant amounts of resources
to ensure their systems are in compliance.\33\
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\30\ Salomon Letter at 1.
\31\ Id.
\32\ Id.
\33\ Id.
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In its response, the Board stated that it was concerned that
syndicate members (and ultimately customers) have information regarding
issuer requirements to help frame orders.\34\ Requiring the
dissemination of this information to syndicate members helps ensure
that managers are ``following the rules'' of the syndicate so that, if
there are any problems regarding the economics of the deal, they can be
corrected prior to settlement or when the syndicate monies are
distributed.\35\ The Board recognizes that syndicate managers may incur
additional costs complying with these requirements, however, it
believes the benefits of disclosure to syndicate members of important
information on syndicate operations outweigh such costs.\36\ The
Commission believes that the benefits of increased disclosure (e.g.,
investor protection, market transparency, and equal access to the
municipal securities market) outweigh costs that may be incurred as a
result of the proposed rule change. Thus, the Commission supports the
proposed rule change.
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\34\ MSRB Letter at 2.
\35\ Id.
\36\ Id.
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Salomon strenuously objects to the proposal that syndicate managers
disclose to syndicate members information relating to designations.\37\
Salomon contends that because it and similarly-situated firms provide a
full range of services to issuers and investors and they spend
significant resources to maintain the infrastructure to provide those
services, designations are the way they realize a return on the
investment in that infrastructure.\38\ Moreover, it is Salomon's view
that the proposals run counter to the interest of investors.\39\
According to Salomon, information concerning designations is
competitive, confidential information that should be known only to the
beneficiary of the designation and the syndicate manager (in its
capacity as bookrunner of the underwriting) and should only be
disclosable by the investor.\40\
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\37\ Salomon Letter at 2.
\38\ Id.
\39\ Id.
\40\ Id.
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The Board disagrees that investors would object to the disclosure
of designation information.\41\ The amendment does not require that the
identity of the investors providing the designations be disclosed, only
that the total amount of the designations for each dealer be
disclosed.\42\ The Board believes that all syndicate members have the
right to the disclosure of all designation information.\43\ The MSRB
believes that the proposed rule change will help ``assure syndicate
members of equitable distribution of the economics of the deal pursuant
to syndicate requirements.''\44\
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\41\ MSRB Letter at 2.
\42\ Id.
\43\ Id.
\44\ Id.
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The Commission reiterates its position that it supports more
disclosure in the municipal securities markets. The Commission respects
investors' right to choose the firms with which to do business as well
as syndicate members' rights to accept designations. The Commission
believes, however, that the amount of the designation each member
receives should be disclosed to prevent fraudulent and manipulative
practices in the municipal securities market. According to the Board,
confidentiality is preserved because only the total amount of the
designations is disclosed, thus investors will ``be free to designate
any firm without fear of reprisal or pressure from other syndicate
members.'' The Commission, therefore, supports this proposed rule
change.
IV. Discussion
The Commission believes the proposed rule change is consistent with
the Act and the rules and regulations promulgated thereunder.\45\
Specifically, the Commission believes that approval of the proposed
rule change is consistent with Section 15B(b)(2)(C) \46\ of the Act.
This proposed rule change should help protect investors and the public
interest through its enhanced disclosure and recordkeeping requirements
which are designed to prevent fraudulent and manipulative acts and
practices and to promote just and equitable principles of trade.
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\45\ The Commission has considered the proposed rule's impact on
efficiency, competition and capital formation. The proposed rule
change should improve efficiency in recordkeeping and information
dissemination because the syndicate manager must now maintain a
record of issuer requirements. Competition in the marketplace should
also benefit as designation information will be available to all
members of the syndicate, thus making collusion in the municipal
securities market more difficult. The proposal shortens the deadline
for payment of designations which should decrease the time it takes
for firms to receive revenue which should benefit capital formation.
15 U.S.C 78c(f).
\46\ Section 15B(b)(2)(C) requires the Commission to determine
that the Board's rules are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
municipal securities, to remove impediments to and perfect the
mechanism of a free and open market in municipal securities, and, in
general, to protect investors and the public interest.
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The Commission believes the proposal, which requires managing
underwriters to maintain and where necessary, create records of issuer
requirements, is a reasonable requirement to impose on a syndicate
manager of a new issue of municipal securities. A syndicate manager has
the primary responsibility for conducting the affairs of the syndicate.
Thus, it is appropriate to require the syndicate manager to be
responsible for the recordkeeping concerning syndicate activities. The
Commission recognizes that these managers could experience an increase
in costs attempting to comply with these requirements. However,
syndicate managers are allowed to recover expenses for administrative
tasks performed for the benefit of the syndicate. Further, resolving
accounting discrepancies or other syndicate disputes would be less
cumbersome and time-consuming if accurate records have
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been maintained and are readily accessible.
The Commission believes the proposal, requiring managing
underwriters to disclose all available designation information, should
encourage competition among dealers for other designations in
subsequent underwritings. The proposal should not result in fixed
pricing because only the designation amounts are being revealed.
Investors will still be able to designate any firm they choose, because
the investors' identities will remain confidential. Furthermore,
disclosure of all designation information should prevent delays in
disseminating full designation payments to members because designation
information must be made available to syndicate members within ten
business days following the date of sale. This requirement should,
therefore, help ensure members receive the full designation credit they
have earned.
The Commission also supports shortening the deadline for payment of
designations from 30 business days following delivery of the securities
to the customer to 30 calendar days after the issuer delivers the
securities to the syndicate. The shortened deadline should prevent
syndicate mangers from unnecessarily delaying payment of designations
to syndicate members.
The Commission agrees that an issuer ``set-aside'' is part of the
take-down and, therefore, should be disclosed to syndicate members in
the same manner as customer designations. This proposed rule change
should act as a deterrent to fraudulent activity because disclosure of
take down information including each dealers' percentage must be made
by the later of 15 days following the date of sale or three business
days following receipt by the managing underwriter of notification of
any set-asides by the issuer. Furthermore, timely disclosure of this
information will allow dealers to verify the accuracy of the
information and, where necessary, address any discrepancies before
settlement.
The Commission supports the proposed rule change and Amendment No.
1 concerning the allocation of securities. The proposed rule change
required that the managing underwriter complete the allocation of
securities within 24 hours of the sending of the commitment wire. In
its letter to the MSRB, NYC contended that the proposed rule change
erroneously assumed that a BPA would be signed prior to the completion
of the allocation.\47\ the NYC letter suggested that the allocation may
be completed (and investors be given notice of the allocations) prior
to the signing of the BPA.\48\ In response, the MSRB amended its
proposal to include that any allocations made prior to the signing of
the BPA in a negotiated offering or the official award of the bonds in
a competitive sale must be subject to execution of a BPA or the award,
as appropriate. Furthermore, investors must also be notified of this
fact.\49\
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\47\ NYC Letter at 1.
\48\ Id. at 2.
\49\ Amendment No. 1 at 51977.
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In cases where the BPA is signed before the commitment wire is
sent, the Commission believes 24 hours should give the senior syndicate
manager enough time to complete the allocation of securities. The
Commission understands that there are occasions, however, when a deal
is so complex that it takes longer than 24 hours after the commitment
wire is sent to complete the process (e.g., production and verification
of final numbers, final sizing of the bond sale) so that a BPA may be
signed. The Commission, therefore, supports the amended language which
recognizes this exception,\50\ but protects investors by requiring full
disclosure of the deal's status. Thus, investors will be aware that the
deal could be subject to market fluctuations or may not even be
finalized.
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\50\ In these situations, the Commission notes that senior
syndicate managers should consult the MSRB's rules and
interpretations concerning the sending of confirmations prior to the
signing of the BPA or the date of the award. Amendment No. 1 at
51977.
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V. Conclusion
For the above reasons, the Commission believes that the proposed
rule change is consistent with the provisions of the Act, and in
particular with Section 15B(b)(2)(C).
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\51\ that the proposed rule change and Amendment No. 1 (SR-MSRB-97-
15), are hereby approved.
\51\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\52\
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\52\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32324 Filed 12-3-98; 8:45 am]
BILLING CODE 8010-01-M
